What is factoring and how does it work?
For years my friends have been asking me this question. In all the years of explaining I have always relied on the principal that simpler is better.
So, what is factoring? Factoring is the selling of your receivables (aka invoices) to a factoring company at a discounted rate.
Now how does factoring work?
- Your company does the work and invoices as you normally would.
- You then send your completed invoices and all necessary/applicable backup to your factoring company
- Your factoring company will send you the money for your invoice equal to the predetermined advance rate and the remaining balance (minus fees) goes in to a reserve (much like an escrow).
- Your customer will pay the invoice as they normally would except the remit to address will be to the factoring company as they purchased the invoice, not loaned against, and legally now own said invoice.
- At the time of your reserve release, your factoring company will send you the remaining balance minus the factoring fee.
EXAMPLE: (Please note that this is just an example. Rates and fees will vary from factor to factor)
Invoice Amount – $1000
Advance Rate – 90%
Factoring Fee – 5% (@30 days)
$1000 @ 90% = $900 Advance
$1000 – $900 = $100 Reserve
$1000 @5% = $50 Factoring Fee
$100 – $50 = $50 Reserve Release
Factoring can improve your cash flow and expedite your working capital so that you can make payroll, pay bills, purchase supplies, or expand your business in general. Much like business have variations as to how they work day to day, factoring companies do as well. As always, Please, Please, Please make sure you are working with the factoring company that works best for the way you run your business.
This is just a basic breakdown to factoring but I hope this helps my friends and anyone else that is trying to understand factoring and possibly utilizing it to help keep their business in healthy balance.
To find the best factoring company and learn more visit www.nationalfactoringgroup.com